Recent Economic Data Examined

By Jeff Harding

There have been a flurry of data lately which impel many commentators to declare that the recession is over. They may be right or wrong. But let me discuss the data from my perspective.

First, let’s keep in mind some underlying basic structural changes in the economy that will affect future outcomes:

1. Consumer savings are still rising. While savings decreased last month to 4.6% from 6.2% it was because incomes were lower.
2. Consumer spending will also remain depressed because boomers need to prepare for retirement by repairing their own balance sheets by reducing debt and increasing their nest eggs.
3. Home prices, even after they bottom, will not rise significantly in the next, say, four or five years, depriving consumers of a source of funds to fuel spending.
4. Deleveraging is still occurring in the economy with commercial and multi-unit real estate headed for trouble for the next two to three years.
5. Credit standards have tightened significantly and will remain tight until banks have cleaned up their balance sheets (which will not happen soon).
6. Taxes are likely to increase, perhaps substantially, in the near future as the government seeks ways to finance an increasing deficit. The corollary to this is that tax revenues are down substantially.
7. Federal deficits are likely to drive interest rates up as the government needs to attract foreign investors to its bond auctions.

Analysis of Current Economic Indicators:

Monetizing the debt

This story ought to wake you up. In an interest post in Zero Hedge, reporting on an investigation by Chris Martenson, it appears that the Fed has been propping up Treasury bond auctions. According to Martenson:

Good grief!  Just last week, when the auction results were announced it was trumpeted to great fanfare that there was “more than sufficient” bid-to-cover, “strong demand” and all the rest.

And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.

They didn’t even wait a full week!  A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using “primary dealers” and “POMOs” and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.

In essence, the Fed is just monetizing the debt, that is, “printing money” to cover the auction shortfalls. Contrary to what the Fed is saying, the demand for Treasury paper is weak. This can only mean increasing interest rates. Since mortgage rates are pegged on the 10 year Treasury, that means mortgage rates will rise, Which means that the housing market recovery will be depressed. Of course, we’ve talked about this for a while.

Chinese Economic Recovery

It is hoped that the Peoples Republic of China’s dynamic internal growth will help spur all economies to recovery. In some economists view, rising U.S. exports are good while rising imports (mainly from China) are bad. That’s not quite correct, but regardless, it appears that the numbers coming out of China aren’t to be believed.

First of all, demand in China is falling. According to this morning’s report of the Baltic Dry Index, which tracks shipping costs and is viewed as leading indicator for commodity prices, has had its worst week (down 17.2%) since the peak of the financial crisis last October, as Chinese demand slowed for iron ore and coal. RGE notes that recent growth in China has come from government spending and that private investment has slowed. RGE reports that banks lending has skyrocketed to 25% of 2008 GDP. But …

They have reported 7.1% growth in the first half, but according to a report in the Financial Times: “But the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government’s national figure, raising fresh questions about the accuracy of statistics in the world’s most populous nation.” Apparently the statistics are concocted to please the folks in Beijing. So take these numbers with a grain of salt.

What appears to be occurring is that the government is stimulating another artificial boom, resulting in the DJ Shanghai stock index to double since January 2009 (from 200 to 400). I would say, look out below.

Unemployment Numbers

The reduction in unemployment is a positive sign, assuming it is all true. But, a decline from 9.5% to 9.4% represented a decline in the rate of unemployment. In July 271,000 nonfarm jobs were lost, versus 443,000 in June. That is still 19 straight months of job losses.

These data have been challenged by a number of commentators. In the Wall Street Journal: “The July household survey showed the civilian labor force shrinking by 422,000 and employment falling 155,000. That translated into 267,000 fewer people listed as unemployed. The labor-force participation rate fell 0.2 percentage point in July to 65.5%.” In other words, people who have stopped looking for work have been taken out of the statistical base.

So, let’s see, if the net decline in people looking for work is 267,000, and we only lost 271,000 jobs then is the July number mean anything? Also, take into account that Cash for Clunkers “stimulus,” auto seasonality, and the government increase of Census workers, you have 100,000 “jobs” created on a technical statistical fluke. These calculations were confirmed by Rosenberg and several other commentators. Excluding these factors you have 371,000 jobs lost, or a 9.5% unemployment rate.

There are alternate ways of looking at unemployment, and if you consider those who are looking for jobs, those who are discouraged and not looking for jobs, part-time workers who want full-time jobs, and marginally attached workers, you have a different picture:

Source BLS. Click to enlarge.

Corporate Earnings

There has been a lot of positive news about corporate earnings for Q2 but overall they are negative. Q2 earnings are –32.41% YoY, and Q1 earnings were –31.49% YoY. Here’s the Bloomberg chart (from Zero Hedge):

Corporate Earnings from Bloomberg

I don’t think I can add more to this.

Miscellaneous Data

U.S. consumer credit outstanding fell $10 billion in June, the fifth decline in a row during which the debt balance has shrunk $60 billion or 5.5% at an annual rate — both figures are unprecedented. As the chart below shows, the YoY trend, at -2.8%, is also running at its steepest contractionary rate in over five decades. Gluskin Sheff

We just received the monthly data on commercial bank lending in July and it showed a record contraction of $64.0 billion, which is the equivalent of a 12.0% annualized decline. This was the third month in a row of declining bank credit to households and businesses during which the contraction has totaled $149.0 billion (again, an unprecedented 9.0% decline at an annual rate). We are not sure if a recovery can be sustained without credit creation — we haven’t seen it happen in the past, but maybe there is a new paradigm of a credit-less recovery awaiting us. Gluskin Sheff

Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department figures released yesterday. The Obama administration’s tax cuts, extended jobless benefits and a one-time Social Security bonus have helped mask the damage done by the worst employment slump since the Great Depression.

Personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, yesterday’s Commerce report showed. Excluding the effects of the stimulus plan, June incomes would have dropped 0.1 percent after no change in May, according to the report. In May, one-time additional payments to Social Security recipients boosted incomes 1.3 percent. Bloomberg

Against consensus estimates for a rise to 48.2, this survey of non manufacturing businesses inconveniently fell to 46.4 in June. Since, like many other data points of late, this piece of data had been getting less bad (remember, 50 is zero growth), a relapse for the worse was unwelcome. Factory orders were on the high side of expectations, but the major averages wasted little time in dropping 1% to 1.5% in the wake of the ISM release. The Big Picture (Barry Ritholz)

The report shows the NMI (Non-Manufacturing Index) dropped .6% in July to 46.4, contracting for the 10th consecutive month at a slightly faster rate. Institute for Supply Management

[W]e ran some regressions that suggest that the equity market is already priced for the ISM to hit the 51 mark — as we saw in February 2002 when the index pierced 50 amid visions of a sustained inventory cycle, it was right at that time that the S&P 500 began to sputter. That’s the problem when all the good news — and then some — gets discounted so quickly. We still think disappointment will inevitably set in over the sustainability of an inventory re-stocking that fails to be backed up by a revival in consumer demand. Gluskin Sheff

As you can see this is a mixed bag. I am sitting on my negative conclusions about the economy, mainly because of the underlying structural problems I first mentioned relating to debt, personal and Federal. I also remain wary of inflation as eventually the expanded money supply will work its way into the economy despite the Fed’s exit strategy hopes. As the stimulus ramps up it will postively impact GDP but it will eventually dissipate without lasting results. So, a better Q3 GDP. Then back to deleveraging, asset deflation, and then, inflation.